UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended September 30, 2018
☐
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
Commission
File Number 000-21522
WILLAMETTE
VALLEY VINEYARDS, INC.
(Exact
name of registrant as specified in charter)
|
Oregon
|
|
93-0981021
|
|
(State or other
jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification No.)
|
8800 Enchanted
Way, S.E., Turner, Oregon 97392
(Address of principal executive offices) (Zip
Code)
Registrant's
telephone number, including area code: (503) 588-9463
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: ☒
YES ☐ NO
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files): ☒ YES
☐NO
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated
filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act:
| ☐ Large
accelerated filer |
☐ Accelerated
filer
|
|
|
|
|
☐
Non-accelerated filer
|
☒ Smaller
reporting company
|
|
|
|
|
☐ Emerging
Growth Company
|
|
Indicate
by checkmark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act): ☐YES
☒
NO
Number of shares of common stock outstanding as of November 13,
2018: 4,964,529
WILLAMETTE
VALLEY VINEYARDS, INC.
INDEX
TO FORM 10-Q
|
Part
I - Financial Information
|
3
|
|
|
|
|
Item
1 - Financial Statements (unaudited)
|
3
|
|
|
|
|
Balance
Sheets
|
3
|
|
|
|
|
Statements
of Operations
|
4
|
|
|
|
|
Statements
of Cash Flows
|
5
|
|
|
|
|
Notes
to Unaudited Interim Financial Statements
|
6
|
|
|
|
|
Item
2 - Management's Discussion and Analysis of Financial Condition
and
Results of Operations
|
11
|
|
|
|
|
Item
3 – Quantitative and Qualitative Disclosures about Market
Risk
|
17
|
|
|
|
|
Item
4 - Controls and Procedures
|
17
|
|
|
|
|
Part
II - Other Information
|
18
|
|
|
|
|
Item
1 - Legal Proceedings
|
18
|
|
|
|
|
Item
1A – Risk Factors
|
18
|
|
|
|
|
Item
2 - Unregistered Sales of Equity Securities and Use of
Proceeds
|
18
|
|
|
|
|
Item
3 - Defaults Upon Senior Securities
|
18
|
|
|
|
|
Item
4 – Mine Safety Disclosures
|
18
|
|
|
|
|
Item
5 – Other Information
|
18
|
|
|
|
|
Item
6 – Exhibits
|
18
|
|
|
|
|
Signatures
|
19
|
PART I: FINANCIAL INFORMATION
Item 1 – Financial Statements
WILLAMETTE VALLEY VINEYARDS, INC.
BALANCE SHEETS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
Cash
and cash equivalents
|
$10,940,289
|
$13,776,257
|
|
Accounts
receivable, net
|
1,568,216
|
1,760,039
|
|
Inventories
(Note 2)
|
15,342,544
|
14,793,594
|
|
Prepaid
expenses and other current assets
|
136,468
|
108,102
|
|
Total
current assets
|
27,987,517
|
30,437,992
|
|
|
|
|
|
Other
assets
|
34,836
|
49,153
|
|
Vineyard
development costs, net
|
7,007,928
|
6,006,250
|
|
Property
and equipment, net (Note 3)
|
25,498,387
|
23,201,876
|
|
|
|
|
|
TOTAL ASSETS
|
$60,528,668
|
$59,695,271
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
Accounts
payable
|
$844,135
|
$993,598
|
|
Accrued
expenses
|
1,090,093
|
871,427
|
|
Investor
deposits for preferred stock (Note 9)
|
-
|
430,305
|
|
Current
portion of notes payable
|
1,704,216
|
1,759,652
|
|
Current
portion of long-term debt
|
412,186
|
397,251
|
|
Income
taxes payable
|
302,553
|
125,297
|
|
Deferred
revenue-distribution agreement
|
-
|
95,220
|
|
Unearned
revenue
|
244,631
|
306,564
|
|
Grapes
payable
|
401,854
|
1,455,569
|
|
Total
current liabilities
|
4,999,668
|
6,434,883
|
|
|
|
|
|
|
|
|
|
Notes
payable, net of current portion
|
-
|
137,667
|
|
Long-term
debt, net of current portion and debt issuance costs
|
6,354,502
|
6,655,384
|
|
Deferred
rent liability
|
58,366
|
82,024
|
|
Deferred
gain
|
33,006
|
57,077
|
|
Deferred
income taxes
|
1,587,227
|
1,587,227
|
|
Total
liabilities
|
13,032,769
|
14,954,262
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
Redeemable
preferred stock, no par value, 10,000,000 shares
authorized,
|
|
|
|
4,662,518
shares, liquidation preference $20,117,220, issued and
|
|
|
|
outstanding
at September 30, 2018 and 4,427,991, liquidation
preference
|
|
|
|
$18,375,831
issued and outstanding at December 31, 2017,
|
|
|
|
respectively.
|
19,086,821
|
17,339,508
|
|
Common
stock, no par value, 10,000,000 shares authorized,
4,964,529
|
|
|
|
shares
issued and outstanding at September 30, 2018 and
|
|
|
|
December
31, 2017.
|
8,512,489
|
8,512,489
|
|
Retained
earnings
|
19,896,589
|
18,889,012
|
|
Total
shareholders’ equity
|
47,495,899
|
44,741,009
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$60,528,668
|
$59,695,271
|
The accompanying notes are an integral part of this financial
statement
WILLAMETTE VALLEY VINEYARDS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three months ended
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES, NET
|
$5,461,039
|
$5,143,588
|
$15,814,950
|
$14,907,917
|
|
COST OF SALES
|
1,918,868
|
1,762,214
|
5,660,429
|
5,594,744
|
|
|
|
|
|
|
|
GROSS PROFIT
|
3,542,171
|
3,381,374
|
10,154,521
|
9,313,173
|
|
|
|
|
|
|
|
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
|
2,569,229
|
2,283,143
|
7,530,330
|
6,652,674
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
972,942
|
1,098,231
|
2,624,191
|
2,660,499
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
Interest
income
|
1,964
|
6,535
|
10,968
|
17,596
|
|
Interest
expense
|
(119,270)
|
(127,431)
|
(354,272)
|
(346,997)
|
|
Other
income, net
|
25,967
|
45,886
|
164,009
|
180,462
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
881,603
|
1,023,221
|
2,444,896
|
2,511,560
|
|
|
|
|
|
|
|
INCOME TAX PROVISION
|
(239,966)
|
(398,638)
|
(669,549)
|
(978,346)
|
|
|
|
|
|
|
|
NET INCOME
|
641,637
|
624,583
|
1,775,347
|
1,533,214
|
|
|
|
|
|
|
|
Accrued preferred stock dividends
|
(256,438)
|
(196,587)
|
(767,770)
|
(460,253)
|
|
|
|
|
|
|
|
INCOME APPLICABLE TO COMMON SHAREHOLDERS
|
$385,199
|
$427,996
|
$1,007,577
|
$1,072,961
|
|
|
|
|
|
|
|
Income per common share after preferred dividends
|
$0.08
|
$0.09
|
$0.20
|
$0.21
|
|
|
|
|
|
|
|
Weighted average number of
|
|
|
|
|
|
common shares outstanding
|
4,964,529
|
4,976,732
|
4,964,529
|
4,992,189
|
The accompanying notes are an integral part of this financial
statement
WILLAMETTE
VALLEY VINEYARDS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net
income
|
$1,775,347
|
$1,533,214
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
from
operating activities:
|
|
|
|
Depreciation
and amortization
|
1,205,565
|
1,132,635
|
|
Loss/(gain)
on disposition of property & equipment
|
805
|
(1,243)
|
|
Non-cash
loss from other assets
|
14,317
|
10,033
|
|
Deferred
rent liability
|
(23,658)
|
(23,657)
|
|
Deferred
gain
|
(24,072)
|
(24,072)
|
|
Change
in operating assets and liabilities:
|
|
|
|
Accounts
receivable, net
|
191,823
|
(70,974)
|
|
Inventories
|
(548,950)
|
40,789
|
|
Prepaid
expenses and other current assets
|
(28,366)
|
290,618
|
|
Unearned
revenue
|
(61,933)
|
(10,557)
|
|
Deferred
revenue-distribution agreement
|
(95,220)
|
(107,145)
|
|
Grapes
payable
|
(1,053,715)
|
(430,152)
|
|
Accounts
payable
|
(206,797)
|
12,886
|
|
Accrued
expenses
|
218,666
|
(40,558)
|
|
Income
taxes payable
|
177,256
|
137,346
|
|
Net
cash from operating activities
|
1,541,068
|
2,449,163
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
Additions
to vineyard development costs
|
(1,121,992)
|
(795,456)
|
|
Additions
to property and equipment
|
(3,325,232)
|
(2,289,578)
|
|
Proceeds
from sale of property and equipment
|
-
|
45,000
|
|
Net
cash from investing activities
|
(4,447,224)
|
(3,040,034)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Proceeds
from long-term debt
|
-
|
2,672,659
|
|
Proceeds
from investor deposits held as liability
|
-
|
1,713,210
|
|
Payment
on installment note for property purchase
|
(193,103)
|
(280,496)
|
|
Payments
on long-term debt
|
(285,947)
|
(350,939)
|
|
Proceeds
from issuance of preferred stock
|
549,238
|
4,596,779
|
|
Proceeds
from exercise of stock options
|
-
|
21,630
|
|
Repurchase
of common stock
|
-
|
(479,144)
|
|
Net
cash from financing activities
|
70,188
|
7,893,699
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
(2,835,968)
|
7,302,828
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
13,776,257
|
5,706,351
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
$10,940,289
|
$13,009,179
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
Purchase
of property and vineyard development costs with notes
payable
|
$-
|
$1,950,333
|
|
Purchases
of property and equipment and vineyard development
|
|
|
|
costs
included in accounts payable
|
$177,338
|
$222,565
|
The accompanying notes are an integral part of this financial
statement
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The
accompanying unaudited interim financial statements as of September
30, 2018 and for the three and nine months ended September 30, 2018
and 2017 have been prepared in conformity with accounting
principles generally accepted in the United States
(“GAAP”) for interim financial statements. The
financial information as of December 31, 2017 is derived from the
audited financial statements presented in the Willamette Valley
Vineyards, Inc. (the “Company”) Annual Report on Form
10-K for the year ended December 31, 2017. Certain information or
footnote disclosures normally included in financial statements
prepared in accordance with U.S. GAAP have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the accompanying
financial statements include all adjustments necessary (which are
of a normal recurring nature) for the fair statement of the results
of the interim periods presented. The accompanying financial
statements should be read in conjunction with the Company’s
audited financial statements for the year ended December 31, 2017,
as presented in the Company’s Annual Report on Form
10-K.
Operating
results for the three and nine months ended September 30, 2018 are
not necessarily indicative of the results that may be expected for
the entire year ending December 31, 2018, or any portion
thereof.
The
Company’s revenues include direct-to-consumer sales and
national sales to distributors. These sales channels utilize shared
resources for production, selling and distribution.
Earnings
per share after preferred stock dividends are computed based on the
weighted-average number of common shares outstanding each
period.
The
following table presents the earnings per share after preferred
stock dividends calculation for the periods shown:
|
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$641,637
|
$624,583
|
$1,775,347
|
$1,533,214
|
|
Accrued
preferred stock dividends
|
(256,438)
|
(196,587)
|
(767,770)
|
(460,253)
|
|
|
|
|
|
|
|
Net
income applicable to common shares
|
$385,199
|
$427,996
|
$1,007,577
|
$1,072,961
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
4,964,529
|
4,976,732
|
4,964,529
|
4,992,189
|
|
|
|
|
|
|
|
Income per common share
|
|
|
|
|
|
after preferred
dividends
|
$0.08
|
$0.09
|
$0.20
|
$0.21
|
Recently issued accounting standards (adopted) – In May
2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with
Customers (Topic 606) (“ASU 2014-09”), a new standard to
achieve a consistent application of revenue recognition within the
U.S., resulting in a single revenue model to be applied by
reporting companies under GAAP. The original effective date for ASU
2014-09 would have required adoption by the Company in the first
quarter of fiscal 2017 with early adoption prohibited. In August
2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with
Customers (Topic 606) - Deferral of the Effective Date
(“ASU 2015-14”), which
defers the effective date of ASU 2014-09 for one year and permits
early adoption in accordance with the original effective date of
ASU 2014-09.
The new revenue standard was required to be applied retrospectively
to each prior reporting period presented or prospectively with the
cumulative effect of initially applying the standard recognized at
the date of initial application. The Company adopted the standard
in the first quarter of 2018 using the modified prospective method.
The Company evaluated the effect of the standard and concluded it
was not material to the Company’s financial reporting.
Additionally, the Company concluded that the application of the
standard did not have a material effect that would require a
retrospective adjustment.
The
Company recognizes revenue when obligations under the terms of a
contract with its customer are satisfied, generally, this occurs
when the product is shipped and title passes to the customer. The
Company’s standard terms are ‘FOB’ shipping
point, with no customer acceptance provisions. Revenue is measured
as the amount of consideration expected to be received in exchange
for transferring products. The cost of price promotions and rebates
are treated as reductions of revenue. No products are sold on
consignment. Credit sales are recorded as trade accounts receivable
and no collateral is required. Revenue from items sold through the
Company’s retail locations is recognized at the time of sale.
Net revenue reported herein is shown net of sales allowances and
excise taxes. If the conditions for revenue recognition are not
met, the Company defers the revenue until all conditions are met.
As of September 30, 2018 and December 31, 2017, the Company has
recorded deferred revenue in the amount of $134,011 and $103,246,
respectively, which is included in accrued expenses on the balance
sheet.
The
Company has price incentive programs with its distributors to
encourage product placement and depletions. When recording a sale
to the customer, an incentive program liability is recorded to
accrued liabilities and sales are reported net of incentive program
expenses. Incentive program payments are made when completed
incentive program payment requests are received from the customers.
Incentive payments to a customer reduce the incentive program
accrued liability. For the three months ended September 30, 2018
and 2017, the Company recorded incentive program expenses of
$195,603 and $214,174, respectively, as a reduction in sales on the
Statements of Operations. For the nine months ended September 30,
2018 and 2017, the Company recorded incentive program expenses of
$678,742 and $579,827, respectively, as a reduction in sales on the
Statement of Operations. As of September 30, 2018 and December 31,
2017, the Company has recorded an incentive program liability in
the amount of $45,842 and $49,075, respectively, which is included
in accrued expenses on the balance sheet. Estimates are based on historical and
projected experience for each type of program or customer and have
historically been in line with actual costs
incurred.
Recently issued accounting standards (not yet adopted) -
In February 2016, the FASB issued ASU
2016-02, Leases (“ASU 2016-02”). This update requires
that lessees recognize assets and liabilities on the balance sheet
for the rights and obligations created by all leases with terms of
more than 12 months. ASU 2016-02 also will require disclosures
designed to give financial statement users information on the
amount, timing, and uncertainty of cash flows arising from leases.
These disclosures include both qualitative and quantitative
information. The effective date for ASU 2016-02 is for fiscal
years, and interim periods within those fiscal years, beginning
after December 15, 2018 with earlier adoption permitted.
The Company
is currently evaluating the impact of the pending adoption of this
new standard on its unaudited interim financial statements and has
yet to determine the overall impact this ASU is expected to have.
Management currently anticipates recognizing a right-of-use asset
and a lease liability associated with its long-term operating
leases.
The accounting standards that have been issued by the FASB or other
standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on our
financial statements upon adoption.
2) INVENTORIES
The
Company’s inventories, by major classification, are
summarized as follows, as of the dates shown:
|
|
|
|
|
|
|
|
|
Winemaking
and packaging materials
|
$663,079
|
$849,825
|
|
Work-in-process
(costs relating to
|
|
|
|
unprocessed
and/or unbottled wine products)
|
6,012,597
|
8,126,838
|
|
Finished
goods (bottled wine and related products)
|
8,666,868
|
5,816,931
|
|
|
|
|
|
Current
inventories
|
$15,342,544
|
$14,793,594
|
3) PROPERTY AND EQUIPMENT
The
Company’s property and equipment consists of the following,
as of the dates shown:
|
|
|
|
|
|
|
|
|
Construction
in progress
|
$2,814,220
|
$1,036,615
|
|
Land,
improvements and other buildings
|
10,925,953
|
10,197,388
|
|
Winery
building and hospitality center
|
15,286,053
|
15,055,935
|
|
Equipment
|
11,882,500
|
11,221,964
|
|
|
|
|
|
|
40,908,726
|
37,511,902
|
|
|
|
|
|
Accumulated
depreciation
|
(15,410,339)
|
(14,310,026)
|
|
|
|
|
|
Property
and equipment, net
|
$25,498,387
|
$23,201,876
|
4) DISTRIBUTION AGREEMENT RECEIVABLE AND DEFERRED
REVENUE
Effective
September 1, 2011, the Company entered into an agreement with
Young’s Market Company for distribution of Company-produced
wines in Oregon and Washington. The terms of this contract included
exclusive rights to distribute Willamette Valley Vineyard’s
wines in Oregon and Washington for seven years and expired
September 1, 2018. To facilitate the transition, with as little
disruption as possible, Young’s Market Company agreed to
compensate Willamette Valley Vineyards for ongoing Oregon sales and
branding efforts. As a result, the Company received $250,000 per
year starting on September 2011 for each of the next four years for
a total of $1,000,000. In October of 2014, the Company received
payment of the final $250,000 under this agreement. The total
amount of $1,000,000 received by the Company related to this
agreement was being recognized as revenue on a straight line basis
over the seven year life of the agreement. For the three months
ended September 30, 2018 and 2017, the Company recognized revenue
related to this agreement in the amount of $23,790 and $35,715,
respectively, recorded to other income. For the nine months ended
September 30, 2018 and 2017, the Company recognized revenue related
to this agreement in the amount of $95,220 and $107,145,
respectively, recorded to other income. All deferred revenue, as a
result of this agreement, has been recognized as of September 30,
2018.
5) DEBT
Line of Credit Facility – In December of 2005 the
Company entered into a revolving line of credit agreement with
Umpqua Bank that allows borrowings of up to $2,000,000 against
eligible accounts receivable and inventories as defined in the
agreement. The revolving line bears interest at prime, is payable
monthly, and is subject to annual renewal. In June of 2018, the
Company renewed the credit agreement until July 31, 2019. The
interest rate was 4.00% at September 30, 2018 and December 31,
2017. At September 30, 2018 and December 31, 2017 there was no
outstanding balance on this revolving line of credit.
Notes payable –In March of 2017 the Company purchased
approximately 45 acres of farmland in the Walla Walla AVA under
terms that included paying one third of the price upon closing, one
third on March 15, 2018 and one third on March 15, 2019. As of
September 30, 2018, the Company had a balance of $137,666 due on
this note. As of December 31, 2017, the Company had a balance due
of $275,333. No interest accrues under the terms of this
note.
In
February of 2017 the Company purchased property, including vineyard
land, bare land and structures in the Dundee Hills AVA under terms
that included a 15 year note payable with quarterly payments of
$42,534 at 6%. The note may be called by the owner, up to the
outstanding balance, with 180 days written notice. As of September
30, 2018, the Company had a balance of $1,566,550 due on this note.
As of December 31, 2017, the Company had a balance of $1,621,986
due on this note.
Long Term Debt –The Company has two long term debt
agreements with Farm Credit Services with an aggregate outstanding
balance of $6,915,451 and $7,202,727 as of September 30, 2018 and
December 31, 2017. These loans require monthly principal and
interest payments of $62,067 for the life of the loans, at annual
fixed interest rates of 4.75% and 5.21%, and with maturity dates of
2028 and 2032. The general purposes of these loans were to make
capital improvements to the winery and vineyard
facilities.
The
Company has an outstanding loan with Toyota Credit Corporation
maturing in February 2021, at zero interest, with an outstanding
balance of $26,774 and $35,381 as of September 30, 2018 and
December 31, 2017, respectively. The purpose of this loan was to
purchase a vehicle.
As of
September 30, 2018, the Company had unamortized debt issuance costs
of $175,537. As of December 31, 2017, the Company had unamortized
debt issuance costs of $185,472
6) STOCK BASED COMPENSATION
The
Company had a stock incentive plan, originally created in 1992,
most recently amended in 2001. No additional grants may be made
under the plan. All stock options contained an exercise price that
was equal to the fair market value of the Company’s stock on
the date the options were granted. All stock options had been
exercised as of December 31, 2017.
7) INTEREST AND TAXES PAID
Income taxes – The Company paid $158,000 and $331,000
in income taxes for the three months ended September 30, 2018 and
2017, respectively. The Company paid $492,250 and $841,000 in
income taxes for the nine months ended September 30, 2018 and 2017,
respectively.
Interest - The Company paid $113,889 and $119,615 for the
three months ended September 30, 2018 and 2017, respectively, in
interest on long-term debt. The Company paid $343,726 and $311,077
for the nine months ended September 30, 2018 and 2017,
respectively, in interest on long-term debt.
8) SEGMENT REPORTING
The
Company has identified two operating segments, Direct Sales and
Distributor Sales, based upon their different distribution
channels, margins and selling strategies. Direct Sales includes
retail sales in the tasting room and remote sites, Wine Club sales,
on-site events, kitchen and catering sales and other sales made
directly to the consumer without the use of an intermediary,
including sales of bulk wine or grapes. Distributor Sales include
all sales through a third party where prices are given at a
wholesale rate.
The two
segments reflect how the Company’s operations are evaluated
by senior management and the structure of its internal financial
reporting. The Company evaluates performance based on the gross
profit of the respective business segments. Selling expenses that
can be directly attributable to the segment, including depreciation
of segment specific assets, are included, however, centralized
selling expenses and general and administrative expenses are not
allocated between operating segments. Therefore, net income
information for the respective segments is not available. Discrete
financial information related to segment assets, other than segment
specific depreciation associated with selling, is not available and
that information continues to be aggregated.
The
following table outlines the sales, cost of sales, gross margin,
directly attributable selling expenses, and contribution margin of
the segments for the three and nine month periods ending September
30, 2018 and 2017. Sales figures are net of related excise
taxes.
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
net
|
$2,333,721
|
$2,263,453
|
$3,127,318
|
$2,880,135
|
$5,461,039
|
$5,143,588
|
|
Cost
of Sales
|
542,154
|
555,817
|
1,376,714
|
1,206,397
|
1,918,868
|
1,762,214
|
|
Gross
Margin
|
1,791,567
|
1,707,636
|
1,750,604
|
1,783,501
|
3,542,171
|
3,381,374
|
|
Selling
Expenses
|
1,073,089
|
1,022,807
|
554,408
|
423,433
|
1,627,497
|
1,446,240
|
|
Contribution
Margin
|
$718,478
|
$684,829
|
$1,196,196
|
$1,331,200
|
$1,914,674
|
$1,935,134
|
|
Percent
of Sales
|
42.7%
|
44.0%
|
57.3%
|
56.0%
|
100.0%
|
100.0%
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
net
|
$6,237,364
|
$5,747,579
|
$9,577,586
|
$9,160,338
|
$15,814,950
|
$14,907,917
|
|
Cost
of Sales
|
1,580,697
|
1,510,003
|
4,079,732
|
4,084,741
|
5,660,429
|
5,594,744
|
|
Gross
Margin
|
4,656,667
|
4,237,576
|
5,497,854
|
5,075,597
|
10,154,521
|
9,313,173
|
|
Selling
Expenses
|
3,089,948
|
2,742,294
|
1,550,114
|
1,351,216
|
4,640,062
|
4,093,510
|
|
Contribution
Margin
|
$1,566,719
|
$1,495,282
|
$3,947,740
|
$3,724,381
|
$5,514,459
|
$5,219,663
|
|
Percent
of Sales
|
39.4%
|
38.6%
|
60.6%
|
61.4%
|
100.0%
|
100.0%
|
Direct
sales include $66,420 and $30,624 of bulk wine sales in the three
months ended September 30, 2018 and 2017, respectively. Direct
sales include $201,390 and $194,412 of bulk wine sales in the nine
months ended September 30, 2018 and 2017,
respectively.
9) SALE OF PREFERRED STOCK
In August 2015, the Company commenced a public offering of our
Series A Redeemable Preferred Stock pursuant to a registration
statement filed with the Securities and Exchange Commission. The
preferred stock under this issue is non-voting and ranks senior in
rights and preferences to the Company’s common stock.
Shareholders of this issue are entitled to receive dividends, when
and as declared by the Company’s Board of Directors, at a
rate of $0.22 per share. Dividends accrued but not paid will be
added to the liquidation preference of the stock until the dividend
is declared and paid. At any time after June 1, 2021, the Company
has the option, but not the obligation, to redeem all of the
outstanding preferred stock in an amount equal to the original
issue price of $4.15 per share plus accrued but unpaid dividends
and a redemption premium equal to 3% of the original issue price of
$4.15 per share. The Company registered this transaction with the
securities authorities of the States of Oregon and Washington and
subsequently obtained a listing on the NASDAQ under the trading
symbol WVVIP. This issue had an aggregate initial offering price
not to exceed $6,000,000 and was fully subscribed as of December
31, 2015.
On December 23, 2015 the Company filed a Registration Statement on
Form S-3 with the SEC pertaining to the potential future issuance
of one or more classes or series of debt, equity or derivative
securities. On February 28, 2016 shareholders of the Series A
Redeemable Preferred Stock approved an increase in shares
designated as Series A Redeemable Preferred Stock, from 1,445,783
to 2,857,548 shares, and amended the certificate of designation for
those shares to allow the Company’s Board of Directors to
make future increases.
On March 10, 2016 the Company filed a Prospectus Supplement to the
December 2015 Form S-3, pursuant to which the Company proposed to
offer and sell, on a delayed or continuous basis, up to 970,588
additional shares of Series A Redeemable Preferred stock having
proceeds not to exceed $4,125,000. This stock was established to be
sold in four offering periods beginning with an offering price of
$4.25 per share and concluding at $4.55 per share. The Company sold
all preferred stock available under this offering.
On May
3, 2017, the Company filed with the SEC a Prospectus Supplement to
the December 2015 Form S-3,
pursuant to which the Company proposed to offer and sell, on a
delayed or continuous basis, up to 2,298,851 additional shares of
Series A Redeemable Preferred stock having proceeds not to exceed
$10,000,000. This stock was established to be sold in four offering
periods beginning with an offering price of $4.35 per share and
concluding at $4.65 per share. The Company sold all preferred stock
available under this offering.
10) COMMITMENTS AND CONTINGENCIES
Litigation – From time to time, in the normal
course of business, the Company is a party to legal proceedings.
Management believes that these matters will not have a material
adverse effect on the Company’s financial position, results
of operations or cash flows, but, due to the nature of litigation,
the ultimate outcome of any potential actions cannot presently be
determined.
Grape Purchases - The Company has entered into a long-term
grape purchase agreement with one of its Willamette Valley wine
grape growers. This contract amended and extended three separate
contracts for the purchase of fruit through the 2023 harvest year.
With this agreement the Company purchases an annually agreed upon
quantity of fruit, at pre-determined prices, within strict quality
standards and crop loads. The Company cannot calculate the minimum
or maximum payment as such a calculation is dependent in large part
on unknowns such as the quantity of fruit needed by the Company and
the availability of grapes produced that meet the strict quality
standards in any given year. If no grapes are produced that meet
the contractual quality levels, the grapes may be refused, and no
payment would be due.
Lease – The Company has entered a five year lease,
expiring in March 2023, to open Willamette Wine Works in Folsom,
California which will include food and pairings and a unique
hands-on blending experience featuring locally made Natoma
wine.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As used
in this Quarterly Report on Form 10-Q, “we,”
“us,” “our” and “the Company”
refer to Willamette Valley Vineyards, Inc.
Forward Looking Statements
This
Management’s Discussion and Analysis of Financial Condition
and Results of Operations and other sections of this Form 10-Q
contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve risks and uncertainties that are
based on current expectations, estimates and projections about the
Company’s business, and beliefs and assumptions made by
management. Words such as “expects,”
“anticipates,” “intends,”
“plans,” “believes,” “seeks,”
“estimates” “intends,” “plans,”
“predicts,” “potential,”
“should,” or “will” or the negative thereof
and variations of such words and similar expressions are intended
to identify such forward-looking statements. Therefore, actual
outcomes and results may differ materially from what is expressed
or forecasted in such forward-looking statements due to numerous
factors, including, but not limited to: availability of financing
for growth, availability of adequate supply of high quality grapes,
successful performance of internal operations, impact of
competition, changes in wine broker or distributor relations or
performance, impact of possible adverse weather conditions, impact
of reduction in grape quality or supply due to disease, changes in
consumer spending, the reduction in consumer demand for premium
wines and the impact of governmental regulatory decisions. In
addition, such statements could be affected by general industry and
market conditions and growth rates, and general domestic economic
conditions. Many of these risks as well as other risks that may
have a material adverse impact on our operations and business, are
identified in Item 1A in the Company’s Annual Report on Form
10-K for the year ended December 31, 2017, as well as in the
Company’s other Securities and Exchange Commission filings
and reports. The forward-looking statements in this report are made
as of the date hereof, and, except as otherwise required by law,
the Company disclaims any intention or obligation to update or
revise any forward-looking statements or to update the reasons why
the actual results could differ materially from those projected in
the forward-looking statements, whether as a result of new
information, future events or otherwise.
Critical Accounting Policies
The
foregoing discussion and analysis of the Company’s financial
condition and results of operations are based upon our financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these financial statements requires the
Company’s management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to revenue recognition,
collection of accounts receivable, valuation of inventories, and
amortization of vineyard development costs. The Company bases its
estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions
or conditions. A description of the Company’s critical
accounting policies and related judgments and estimates that affect
the preparation of the Company’s financial statements is set
forth in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2017. Such policies were unchanged during
the nine months ended September 30, 2018 with the exception of the
adoption of ASU
2014-09.
Overview
The
Company continues to position itself for strategic growth through
property purchases, property development and issuance of Preferred
Stock. Management expects near term financial results to be
negatively impacted by these activities as a result of incurring
costs of accrued preferred stock dividends, strategic planning and
development costs and other growth associated costs.
The
Company’s wines are made from grapes grown in vineyards
owned, leased or contracted by the Company, and from grapes
purchased from other nearby vineyards. The grapes are harvested,
fermented and made into wine primarily at the Company’s
winery in Turner Oregon (the “Winery”) and the wines
are sold principally under the Company’s Willamette Valley
Vineyards label, but also under the Griffin Creek, Elton, Pambrun,
Maison Bleue and Tualatin Estates labels. The Company also owns the
Tualatin Estate Vineyards and Winery, located near Forest Grove,
Oregon. The Company generates revenues from the sales of wine to
wholesalers and direct to consumers.
Direct
to consumer sales primarily include sales through the
Company’s tasting rooms and wine club. Direct to consumer
sales are more profitable to the Company than sales through
distributors due to prices received being closer to retail than
those prices paid by wholesalers. The Company continues to
emphasize growth in direct to consumer sales through the
Company’s remodeled 35,642 square foot hospitality facility
at the Winery and expansion and growth in wine club membership.
Additionally, the Company’s preferred stock sales since
August 2015 have resulted in approximately 5,775 preferred
stockholders many of which the Company believes are wine
enthusiasts. When considering joint ownership, we believe these new
shareholders represent approximately 9,000 potential customers of
the Company. Additionally, the Company has approximately 8,853
common shareholders which we believe represent an estimated 13,700
potential customers when considering joint ownership. Membership in
the Company’s wine club increased by approximately 209 net
members, or 2.8%, to a total of 7,637 members during the nine
months ending September 30, 2018. The Company believes the increase
in preferred shareholders, who are eligible for larger discounts
than wine club members, has reduced the number of people who would
otherwise become Wine Club members. However, management anticipates
that new preferred shareholders will purchase the Company’s
wines over a longer period of time, than the average Wine Club
member, making their enhanced winery status beneficial to the
Company.
Periodically,
the Company will sell grapes or bulk wine, due to them not meeting
Company standards or being excess to production targets, however
this is not a significant part of the Company’s activities.
The Company had bulk wine sales of $66,420 for the three months
ended September 30, 2018 and $30,624 in bulk wine sales for the
same period of 2017. The Company had bulk wine sales of $201,390
for the nine months ended September 30, 2018 and $194,412 in bulk
wine sales for the same period of 2017.
The
Company sold approximately 102,155 and 98,383 cases of produced
wine during the nine months ended September 30, 2018 and 2017,
respectively, an increase of 3,772 cases, or 3.8% in the current
year period over the prior year period. The increase in wine
case sales was the result of increased sales through distributors
as well as increased direct to consumer case sales.
Cases
sold in 2018 or 2017 does not include unfulfilled
“futures”, where a customer prepays for a wine not yet
released. Proceeds from these sales are not recognized as revenue
until the wine is shipped and are reflected as unearned revenue.
Selling expenses for these sales are recognized in the period in
which the expense is incurred.
Cost of
sales includes grape costs, whether purchased or grown at Company
vineyards, winemaking and processing costs, bottling, packaging,
warehousing and shipping and handling costs. For grapes grown at
Company vineyards, costs include farming expenditures and
amortization of vineyard development costs.
At
September 30, 2018, wine inventory included approximately 135,151
cases of bottled wine and 299,693 gallons of bulk wine in various
stages of the aging process. Case wine is expected to be sold over
the next 12 to 24 months and generally before the release date of
the next vintage. The Winery bottled approximately 153,536 cases
during the nine months ended September 30, 2018.
Net income for the three months
ended September 30, 2018 and 2017 was $641,637 and $624,583,
respectively, an increase of $17,054, or 2.7%, in the current year
period over the prior year period. Net income for the nine months
ended September 30, 2018 and 2017 was $1,775,347 and $1,533,214,
respectively, an increase of $242,133, or 15.8%, in the current
year period over the prior year period.
Income
applicable to common shareholders for the three months ended
September 30, 2018 and 2017 was $385,199 and $427,996,
respectively, a decrease of $42,797, or 10.0%, in the current year
period over the prior year period. Income applicable to common
shareholders for the nine months ended September 30, 2018 and 2017
was $1,007,577 and $1,072,961, respectively, a decrease of $65,384,
or 6.1%, in the current year period over the prior year
period.
Overall
gross profit for the three months ended September 30, 2018 and 2017
was $3,542,171 and $3,381,374, respectively, an increase of
$160,797, or 4.8%, in the current year period over the prior year
period. Gross profit as a percentage of net sales for the three
months ended September 30, 2018 and 2017 was 64.9% and 65.7%,
respectively, a decrease of 0.8 percentage points in the current
year period over the prior year period. Overall gross profit for
the nine months ended September 30, 2018 and 2017 was $10,154,521
and $9,313,173, respectively, an increase of $841,348, or 9.0%, in
the current year period over the prior year period. Gross profit as
a percentage of net sales for the nine months ended September 30,
2018 and 2017 was 64.2% and 62.5%, respectively, an increase of 1.7
percentage points in the current year period over the prior year
period.
The
Company generated $0.08 and $0.09 in basic earnings per share after
preferred dividends during the three months ended September 30,
2018 and 2017, respectively. The Company generated $0.20 and $0.21
in basic earnings per share after preferred dividends during the
nine months ended September 30, 2018 and 2017,
respectively.
Willamette Valley
Vineyards continues to receive positive recognition through
national magazines, regional publications, local newspapers, online
articles and broadcast networks in the third quarter of
2018.
Wine
Advocate awarded the
Company’s 2016 Estate Chardonnay with a score of 93 points,
the 2016 Estate Pinot Noir with a score of 92 points, the 2015
Méthode Champenoise Brut with a score of 92 points, the 2016
Vintage 43 Pinot Noir (made by Bill Fuller) with a score of 91+
points and the Tualatin Estate Pinot Noir with a score of 90
points.
The Company’s new gray water system was highlighted in
a Capital
Press article titled
“Advancing Industry: Innovations in wine and
vine.”
The Company’s Ownership benefits were highlighted in
an MSN
Money article titled,
“21 Investor Perks that are Even Better than
Money.”
The Company’s Whole Cluster Pinot Noir was highlighted in
a Forbes article titled, “Why it's Time to Try
Oregon Pinot Noir Now.”
The Company’s Whole Cluster Pinot Noir and Whole Cluster
Rosé of Pinot Noir was highlighted in
a San
Angelo Standard-Times article titled, “What to Know About
Wine and Whole Cluster Fermentation.”
Gus Clemens reviewed The Company’s 2017 Whole Cluster
Rosé of Pinot Noir and described it as “fresh, bright,
delicious.”
Chuck Hill reviewed The Company’s 2016
Griffin Creek Viognier and described it as “a favorite
with my tasters for its complex aromas and flavors of citrus, stone
fruits, pineapple, honey and floral perfume.”
The Company was awarded with the "People Love us on Yelp" 2018
award by Yelp, based on positive user reviews.
The Company’s McMinnville Tasting Room was featured in
a Yamhill County
News-Register feature
article.
The Company’s 28th Annual
Oregon Grape Stomp Championship & Harvest Celebration event was
featured in an “Out and About with Drew Carney” segment
on KGW Newschannel 8 where Drew Carney tasted the Company’s
Estate Pinot Noir, featured The Company’s Winery Chef and
stomped grapes.
The Company’s Senior Winery Ambassador was featured in a KGW
Newschannel 8 segment about pairing wines with “fair
food.”
The Company’s Estate Pinot Noir was on display during an
“On the Go with Joe” segment about Oregon Cheese Month
on KPTV FOX 12.
The Statesman
Journal highlighted The
Company’s 28th Annual
Oregon Grape Stomp Championship & Harvest Celebration in two
feature articles.
The Statesman
Journal included The
Company’s “Something to Wine About” and
Willamette Shakespeare events in two entertainment
articles.
The Statesman
Journal included The
Company in two feature articles about Salem Dining Month, for which
The Company is a presenting sponsor and
organizer.
The Company’s 28th Annual
Oregon Grape Stomp Championship & Harvest Celebration was
featured in a Travel Salem blog and on
ShareOregon.com.
The Company’s Willamette Shakespeare event was featured
in The
Oregonian and Oregon Arts
Watch.
The Company was included as a "wine-worthy tasting stop" in a blog
on CarRentals.com.
The Company was included a West Ranch Beacon blog that stated
"Willamette Valley Vineyards Pinot Noir is hands down one of the
best Pinots out there."
The Company’s Whole Cluster Pinot Noir was featured in blogs
by Bigger Than Your Head and The Nittany Epicurean.
RESULTS OF OPERATIONS
Revenue
Sales
for the three months ended September 30, 2018 and 2017 were
$5,461,039 and $5,143,588, respectively, an increase of $317,451,
or 6.2%, in the current year period over the prior year period.
This increase was mainly caused by an increase in direct
sales, including bulk wine, of $70,268 and an increase in sales
through distributors of $247,183 in the current year three month
period over the prior year period. The increase in direct
sales to consumers was primarily the result of increased tasting
room, wine club, and kitchen sales in 2018 when compared to 2017.
The increase in sales through distributors was not attributable to
an isolated factor. Sales for the nine months ended September 30,
2018 and 2017 were $15,814,950 and $14,907,917, respectively, an
increase of $907,033, or 6.1%, in the current year period over the
prior year period. This increase was mainly caused by an increase in direct
sales, including bulk wine, of $489,785 and an increase in sales
through distributors of $417,248 in the current year period over
the prior year period. The increase in direct sales to
consumers was primarily the result of increased tasting room, wine
club, and kitchen sales in 2018 when compared to 2017. The increase
in sales through distributors was not attributable to an isolated
factor.
Cost of Sales
Cost of
Sales for the three months ended September 30, 2018 and 2017 were
$1,918,868 and $1,762,214, respectively, an increase of $156,654,
or 8.9%, in the current period over the prior year period. This
change was primarily the result of an increase in cases sold in the
current period. Cost of Sales for the nine months ended September
30, 2018 and 2017 were $5,660,429 and $5,594,744, respectively, an
increase of $65,685, or 1.2%, in the current period over the prior
year period. This change was primarily the result of an increase in
product sales in the current period.
Gross Profit
Gross
profit for the three months ended September 30, 2018 and 2017 was
$3,542,171 and $3,381,374, respectively, an increase of $160,797,
or 4.8%, in the current year period over the prior year period.
Gross profit for the nine months ended September 30, 2018 and 2017
was $10,154,521 and $9,313,173, respectively, an increase of
$841,348, or 9.0%, in the current year period over the prior year
period. These increases were primarily the result of an overall
increase in wine sales.
Gross
profit as a percentage of net sales for the three months ended
September 30, 2018 and 2017 was 64.9% and 65.7%, respectively, a
decrease of 0.8 percentage points in the current year period over
the prior year period. Gross profit as a percentage of net sales
for the nine months ended September 30, 2018 and 2017 was 64.2% and
62.5%, respectively, an increase of 1.7 percentage points in the
current year period over the prior year period.
Selling, General and Administrative Expense
Selling,
general and administrative expense for the three months ended
September 30, 2018 and 2017 was $2,569,229 and $2,283,143
respectively, an increase of $286,086, or 12.5%, in the current
year period over the prior year period. This increase was primarily
the result of an increase in selling expenses of $209,751, or 19.5%
in addition to an increase in general and administrative expenses
of $76,335, or 9.6% in the current quarter. Selling, general and
administrative expense for the nine months ended September 30, 2018
and 2017 was $7,530,330 and $6,652,674, respectively, an increase
of $877,656, or 13.2%, in the current year period over the prior
year period. This increase was primarily the result of an increase
in selling expenses of $600,722, or 14.1% and an increase in
general and administrative expenses of $276,934, or 11.6% in the
current year. Selling expenses increased in both the first nine
months and third quarter of 2018 compared to the same periods in
2017 primarily as a result of increased sales staffing and
incentive costs, product demonstrations and marketing, among other
selling related activities, as well as costs associated with
operating a new retail outlet in Walla Walla in 2018. General and
administrative expenses increased in both the third quarter and
first nine months of 2018 compared to the same periods in 2017
primarily a result of increased staffing and professional fees
driven mostly by long-term term development activities in
2018.
Interest Expense
Interest
expense for the three months ended September 30, 2018 and 2017 was
$119,270 and $127,431, respectively, a decrease of $8,161 or 6.4%,
in the current year period over the prior year period. Interest
expense for the nine months ended September 30, 2018 and 2017 was
$354,272 and $346,997, respectively, an increase of $7,275 or 2.1%,
in the current year period over the prior year period. The decrease
in interest expense for the third quarter of 2018 was primarily the
result of decreased debt compared to the third quarter of 2017. The
increase in interest expense for the first nine months of 2018 was
primarily the result of additional interest associated with a new
note payable used to finance a property purchase and additional
debt incurred as part of a refinancing transaction in the first
quarter of 2017.
Income Taxes
The
income tax expense for the three months ended September 30, 2018
and 2017 was $239,966 and $398,638, respectively, a decrease of
$158,672 or 39,8%, in the current year period over the prior year
period mostly as a result of lower pre-tax income in the third
quarter of 2018, compared to the same quarter in 2017, in addition
to a decrease in the effective tax rate in 2018. The
Company’s estimated federal and state combined income tax
rate was 27.2% and 39.0% for the three months ended September 30,
2018 and 2017, respectively. The income tax expense for the nine
months ended September 30, 2018 and 2017 was $669,549 and $978,346,
respectively, a decrease of $308,797 or 31.6%, in the current year
period over the prior year period mostly a result of lower pre-tax
income in the first nine months of 2018, compared to the same
period in 2017, in addition to a decrease in the effective tax rate
in 2018. The Company’s estimated federal and state combined
income tax rate was 27.4% and 39.0% for the nine months ended
September 30, 2018 and 2017, respectively. The decrease in the
Company’s tax rate is primarily the result of the enactment
of the Tax Cuts and Jobs Act in December 2017.
Net Income
Net
income for the three months ended September 30, 2018 and 2017 was
$641,637 and $624,583, respectively, an increase of $17,054, or
2.7%, in the current year period over the prior year period. Net
income for the nine months ended September 30, 2018 and 2017 was
$1,775,347 and $1,533,214, respectively, an increase of $242,133,
or 15.8%, in the current year period over the prior year period.
The increase in net income for the third quarter and first nine
months of 2018, compared to the comparable periods in of 2017, was
primarily the result of increased gross profit, combined with a
decrease in taxes associated with the implementation of the Tax
Cuts and Jobs Act in December 2017, being partially offset by
higher selling, general & administrative expenses.
Income Applicable to Common Shareholders
Income
applicable to common shareholders for the three months ended
September 30, 2018 and 2017 was $385,199 and $427,996,
respectively, a decrease of $42,797, or 10.0%, in the current year
quarter over the prior year period. Income applicable to common
shareholders for the nine months ended September 30, 2018 and 2017
was $1,007,577 and $1,072,961, respectively, a decrease of $65,384,
or 6.1%, in the current year period over the prior year period. The
decrease in income applicable to common shareholders in the third
quarter and first nine months of 2018, compared to the same periods
of 2017, was primarily the result of higher net income in the
current periods being more than offset by an increased accrued
preferred stock dividend in 2018 which was primarily driven by an
increase in the number of preferred stock shares
outstanding.
Liquidity and Capital Resources
At
September 30, 2018, the Company had a working capital balance of
$22.9 million and a current working capital ratio of 5.60:1. At
December 31, 2017, the Company had a working capital balance of
$24.0 million and a current working capital ratio of
4.73:1.
At
September 30, 2018, the Company had a cash balance of $10,940,289,
while at December 31, 2017, the Company had a cash balance of
$13,776,257. The decrease in our cash balance during the first nine
months of 2018 was primarily the result of investment in vineyard
development and property and equipment.
Total
cash provided by operating activities in the nine months ended
September 30, 2018 was $1,541,068. Cash provided by operating
activities for the nine months ended September 30, 2018 was
primarily associated with income from operations adjusted for
depreciation expense, an increase in inventory and payment of grape
contracts and other accounts payable.
Total
cash used in investing activities in the nine months ended
September 30, 2018 was $4,447,224. Cash used in investing
activities for the nine months ended September 30, 2018 primarily
consisted of property and equipment purchases and vineyard
development.
Total
cash provided by financing activities in the nine months ended
September 30, 2018 was $70,188. Cash provided by financing
activities for the nine months ended September 30, 2018 consisted
primarily of proceeds from the issuance of preferred stock mostly
offset by the payment of debt.
Non-cash
investing and financing activities in the nine months ended
September 30, 2018 was $177,338. This was primarily the result of
the property and equipment acquisition costs in accounts
payable.
The
Company has an asset-based loan agreement (the “line of
credit”) with Umpqua Bank that allows it to borrow up to
$2,000,000. The Company renewed this agreement, in June 2018, until
July 31, 2019. The index rate of prime plus zero, with a floor of
3.25%, at September 30, 2018 was 4.0%. The loan agreement contains
certain restrictive financial covenants with respect to total
equity, debt-to-equity and debt coverage that must be maintained by
the Company on a quarterly basis. As of September 30, 2018, the
Company was in compliance with all of the financial
covenants.
At
September 30, 2018 and December 31, 2017 the Company had no balance
outstanding on the line of credit. At September 30, 2018, the
Company had $2,000,000 available on the line of
credit.
As of
September 30, 2018 the Company had an installment note payable of
$137,666, due on March 15, 2019 associated with the purchase of 45
acres of farmland in the Walla Walla AVA. No interest accrues under
the terms of this note.
As of
September 30, 2018 the Company had a 15 year installment note
payable of $1,566,550, due in quarterly payments of $42,534,
associated with the purchase of property in the Dundee Hills
AVA.
As of
September 30, 2018, the Company had a total long-term debt balance
of $6,766,688, including the portion due in the next year, owed to
Farm Credit Services and Toyota Credit Corporation, net of debt
issuance costs of $175,537. As of December 31, 2017, the Company
had a total long-term debt balance of $7,238,108, exclusive of debt
issuance costs of $185,473.
The
Company believes that cash flow from operations and funds available
under the Company’s existing credit facilities will be
sufficient to meet the Company’s foreseeable short and
long-term needs.
Off Balance Sheet Arrangements
As of
September 30, 2018 and December 31, 2017, the Company had no
off-balance sheet arrangements.
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
As a
smaller reporting company, the Company is not required to provide
the information required by this item.
ITEM 4:
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures – The Company
carried out an evaluation as of the end of the period covered by
this Quarterly Report on Form 10-Q, under the supervision and with
the participation of the Company’s management, including the
Company’s Chief Executive Officer and the Company’s
Chief Financial Officer, of the effectiveness of the
Company’s disclosure controls and procedures pursuant to
paragraph (b) of Rule 13a-15 and 15d-5 under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”).
Based on that review, the Chief Executive Officer and the Chief
Financial Officer have concluded that the Company’s
disclosure controls and procedures are effective, as of the end of
the period covered by this report, to ensure that information
required to be disclosed by the Company in the reports the Company
files or submits under the Exchange Act (1) is recorded, processed,
summarized, and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms, and (2)
is accumulated and communicated to the Company’s management,
including the Company’s principal executive officer and
principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
– There
have been no changes in our internal control over financial
reporting during the quarter ended September 30, 2018
that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
PART II: OTHER INFORMATION
Item 1 - Legal Proceedings.
From
time to time, the Company is a party to various judicial and
administrative proceedings arising in the ordinary course of
business. The Company’s management and legal counsel have
reviewed the probable outcome of any proceedings that were pending
during the period covered by this report, the costs and expenses
reasonably expected to be incurred, the availability and limits of
the Company’s insurance coverage, and the Company’s
established liabilities. While the outcome of legal proceedings
cannot be predicted with certainty, based on the Company’s
review, the Company believes that any unrecorded liability that may
result as a result of any legal proceedings is not likely to have a
material effect on the Company’s liquidity, financial
condition or results from operations.
Item 1A - Risk Factors.
In addition to the other information set forth in this Quarterly
Report, you should carefully consider the factors discussed in Part
I, “Item 1A. Risk Factors” in our Annual Report on Form
10-K for the fiscal year ended December 31, 2017 (the “2017
Annual Report”), which could materially affect our business,
results of operations or financial condition.
The risk factors have not materially changed as of September 30,
2018 from those disclosed in the 2017 Annual
Report. However, it is important to note that the risks
described in our 2017 Annual Report are not the only risks facing
us. Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial also may eventually prove
to materially adversely affect our business, results of operations
or financial condition.
Item 2 - Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item 3 - Defaults upon Senior Securities.
None.
Item 4 - Mine Safety Disclosures.
Not
applicable.
Item 5 – Other Information.
None.
Item 6 – Exhibits.
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3.1
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Articles of
Incorporation of Willamette Valley Vineyards, Inc. (incorporated by
reference from the Company's Regulation A Offering Statement on
Form 1-A, File No. 24S-2996)
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101
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The
following financial information from the Corporation’s
Quarterly Report on Form 10-Q for the quarter ended September 30,
2018, furnished electronically herewith, and formatted in XBRL
(Extensible Business Reporting Language): (i) Balance Sheets, (ii)
Statements of Operations; (iii) Statements of Cash Flows; and (iv)
Notes to Financial Statements, tagged as blocks of text. (Filed
herewith).
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SIGNATURES
Pursuant
to the requirements of the Security Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
WILLAMETTE
VALLEY VINEYARDS, INC.
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Date: November 13, 2018
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By
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/s/ James W. Bernau
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James W. Bernau
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Chief Executive Officer
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(Principal Executive Officer)
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Date: November 13, 2018
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By
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/s/ Richard F. Goward Jr.
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Richard F. Goward Jr.
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Chief Financial Officer
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(Principal Accounting and Financial
Officer)
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